The Russian financial crisis

"What Were THE SOURCES OF The Russian FINANCIAL MELTDOWN Of 1998? What Role Does The IMF Play In Solving THE CHALLENGE?"

Introduction:

The Russian financial crisis struck Russia on August 1998. The situation in Russia was exacerbated by the global tough economy during that time. This recession had its origins in the Asian turmoil of 1997. In this particular paper, the reasons that were behind the financial meltdown that hit Russia are defined. I will make an effort to analyze why the devaluation of the ruble and the financial meltdown were unavoidable and I am going to also look into the role that the International Monetary Account (IMF) played into solving this problem for the Russians. The main season in this evaluation is 1998 during which almost all of the happenings were very significant. So, it might be very useful to begin talking about the political and financial situation that Russia was in during that period. Russia's overall economy, over the last decade of the 20th century, is at transition following the land of communism in the past due 1980's. Boris Yeltsin was the President of the Russian federation, portion from 1991, and leading the Russian federation through this difficult amount of transition. It is much more interesting and very important to the following examination to concentrate on the period from 1996 to 1998 in order to better understand the problem of the Russian federation. During the late 1996 and the first 1997, the Russian current economic climate showed some symptoms of improvement so that as the OECD study revealed "the Russian economy appeared stronger than at any earlier time during the change period" ( OECD Economic Surveys, Russian Federation, March 2000, OECD Publications, p. 34). This affirmation was backed after indications of the stabilization of end result, the positive signal of the annual GDP progress and a rather tight monetary insurance policy that was put in place by the Russian administration. Each one of these leaded to the stabilization of the inflation and the exchange rate thus making them more predictable for the shareholders. Adding up to all or any these, the living criteria of the Russian population started to recover after being very low through the first many years of the transition period. So, predicated on these advancements the Russian federal government wanted to try and fix things in the financial sector. This work involved the eradication of the government's debt and the control of the government's fiscal imbalances. This was an extremely natural effect by the Russian government bodies but the key flaw in this effort was that it was predicated on the assumption that the relatively low interest levels that were achieved at that time would be placed at the same low level. In other words, the Russian federal required the strong inflow of capital for awarded and that became a terrible problem. This is how the problem stood before November 1997. At that time Asia was struck by a financial crisis and this financial meltdown affected the anticipations of the investors as the export prices increased. So, the increase of the export prices and the drop in their demand induced the reduction of Russia's current bill surplus.

The Causes Of The Russian FINANCIAL MELTDOWN:

Up until now, we have seen that the Russian overall economy was demonstrating some important signs of improvement. But, the Asian financial crisis proved to be really significant for Russia's economical situation. It is true that the Russian government has based mostly its whole economic plan on keeping the interest rate relatively low and on bringing in a strong capital inflow from shareholders. But the Asian financial meltdown made these goals to seem rather ambitious for the federal government of Boris Yeltsin. Russia's current economic climate was heavily dependent on the export of raw materials such as oil, natural gas and metals that accounted for more than 80% of Russian exports. This was indicative of the vulnerability of the Russian current economic climate to the swings in world prices. So, the Asian turmoil acquired a great effect on the Russian current economic climate. The world charges for metals and generally recycleables had increased and so did the costs of Russian exports. This resulted in the land in the demand for Russia's exports.

Apart from that, Russia experienced another major hit in your time and effort to catch the attention of some capital from shareholders. In past due 1997, Russian stock prices suffered a major blow and the prices started slipping. However, there is a time period during which the prices of the currency markets started out increasing but this became a "bubble" as the prices dropped even more. So, after the land of the stock market prices and the increase of the export prices in Russia, buyers started questioning the situation of the Russian economy and doubting the success of their investment funds. So, most of them stopped investing in Russia as there was significant proof instability and of a forthcoming turmoil. This was a major blow in Russia's overall economy as the federal government expected that the inflow of capital from traders would continue. We were holding the effects of the Asian crisis on Russian market during the overdue 1997.

After that, another major problem arose in early on 1998. Chief executive Boris Yeltsin was taken care of with disbelief from both Russian community and the traditional western countries. So that they can right this impression and promote the notion that he is still under control, Boris Yeltsin brought some politics changes into impact. He appointed Sergei Kiriyenko as the new Best Minister succeeding former Best Minister Viktor Chernomyrdin. In addition to that, Boris Fyodorov was appointed deputy Primary Minister and was also called Head of Express Duty Service. With these politics changes taking effect in middle-1998, Yeltsin tried to restore the lost assurance of the traders and generally the western countries. This was not feasible though because Russia was in an exceedingly difficult position at that time. IN-MAY 1998, the problem got a whole lot worse. Kiriyenko recognized that the major problem to be faced by the federal government was the finances. But, the financial situation of the country did not leave him with many options. During that time, the government's budget was very low and because of this the federal government was struggling to pay income and pensions. This happened because the majority of the government's income was going to payments for international and domestic bad debts. This caused the fantastic strike of workers on the Trans-Siberian railway by blocking it. This contributed to the worsening of the problem because the costs of exports increased once more and the export of engine oil, gas and metals not only stopped being profitable but the even helped to raise Russia's arrears.

This leads us to the most important amount of the financial crisis in Russia. In June, Russia was within a crucial point. The expense of imports was higher than the profits gained from exports leaving the government with a poor balance of trade. Moreover, industrial development was even less than that in 1997 and real income of Russians was 10% lower than before. Under all these conditions the devaluation of the ruble and the dialling off of debt repayments were unavoidable for the Russian administration. But, this is avoided temporarily by a $4 billion credit from the International Monetary Finance. The IMF postponed the acceptance of the loan declaring that the Russian federal government was not placing too much effort in the assortment of taxes. This is when Yeltsin appointed Chubais as the Russian rep in talks with the IMF attempting to get some self-confidence from the LADY. Chubais arranged his goals in obtaining a substantial loan from the IMF which according to the Russian administration would help them get away from the crisis. So, the Russian federal government asked for an additional loan, substantially higher this time around than the prior one, in order for Russia to flee the financial collapse. Meanwhile, Yeltsin's appointment of Chubais was achieved with content by the Traditional western powers and consequently Chubais persuaded them to invest in Russia. As Medvedev had written: "Chubais's trip to the IMF head office in Washington had been successful and dollars started to move in to the Russian Central loan company" (Roy Medvedev, Post - Soviet Russia: A Quest With the Yeltsin Period, 2000, Columbia School Press, p. 303). But, this plan only helped the Russian administration for a few weeks as Russia was in a very poor state financially. Therefore, the Russian federal tried to implement an anti- turmoil plan by nurturing the fees but this is of no substantive help as it was really later for Russia to flee the turmoil. Every reserve of the Russian central standard bank was spent in order to keep the exchange rate of the ruble at 6 American us dollars however the reserves were not enough to support such an action for a long time. On the other hand, the loan of the IMF was now approved and Russia acquired nearly 23 billion of American us dollars with a view to help them avoid a possible financial collapse.

In August, the reserves employed by the Russian federal to keep carefully the exchange rate relatively low were tired and because of this the demand for American dollars was increased because the government was failing to keep carefully the exchange rate in a low level. Also, the ministry of financing had no more ruble reserves and this left the country in a very bad situation. Furthermore, Russian markets started collapsing with significant to be the currency, the bond and the stock market. It is important to highlight here that the Russian stock market fell by 75% through the previous year and this was clear proof the worsening of the situation. At last, each one of these factors left the government without option. The devaluation of the ruble was unavoidable and the shortcoming of the federal government to pay its bad debts was a clear indication of its inability to face the problem. So, Russia gone bankrupt in August 17, going out of a fresh exchange rate that was up to 9. 5 American us dollars per ruble. At that time, the government denied calling this consequence a devaluation of the money saying that new exchange rate is part of the "New" forex insurance plan for the security of the ruble. But, the federal government cannot drive away the general public disbelief as the ruble continuing its free show up and the government and the Central Bank or investment company had no more reserves in order to guard the national currency and keep maintaining somehow its value. This still left the united states in a tragic talk about facing an exchange rate of 20 American us dollars per ruble in early September.

The Role WITH THE IMF In Solving THE CONDITION:

The International Monetary Fund can be an international group that has three goals. First of all, it aims at the monitoring and the monitoring of economic and development insurance policies. Second, the IMF has the ability to provide money to countries that face troubles in their balance of payments and finally it provides technical assistance to countries that require it in the areas of training and research.

In the Russian case of 1998, the IMF was loaning money to the Russian federal to be able to help them avoid a financial collapse. This was the only help that the IMF provided to the Russians throughout that time frame. In this aspect of the essay I will try and assess the help given by the IMF to the Russian federal government. As stated before, Russia was at a really difficult financial position during 1997 and 1998. The loan by the IMF was approved in June 1998. At that time, there wasn't much that the Russian authorities could do in order to prevent the financial catastrophe that was arriving. Even if there was time, approving financing to get in a country that encounters difficulties in its balance of payments is not the best solution an individual could suggest. It really is a short-term measure that will not cure the condition but it'll only make it less significant for a short period of time. That is exactly what took place in Russia. The IMF was inclined to provide financial help the Russians but the situation was already uncontrollable. The Russian federal government placed no reserves of money. There was nearly no budget in the government and they were not able to even pay the personnel and the pensioners. Quite simply, the collapse was inevitable at that time that the loans were approved. Alternatively, guess that the monetary aid was presented with to Russia in 1997. That raises a huge question. Would it not make any difference if the Russians received the IMF lending options earlier? The response to this question is clear. Not at all. For a country to cure its financial problems and escape from a difficult situation, it requires not just a financial aid but a plan to achieve that. As Vladimir Mau published: "The problems was due to the irresponsible financial and economic policy of the post-Soviet period" (V. Mau, From turmoil to Expansion, The Centre for Research into Post-Communist Economies, 2005, p. 80). The IMF provided financing to a country that definitely needed it. But there is absolutely no point where we can think that the Russian authorities had a plan with a view to escaping the problems. Boris Yeltsin experienced lost control of the problem long before it reached a crucial point. That is proved by the actual fact that only 5 a few months prior to the collapse of the Russian overall economy, Boris Yeltsin was active replacing the personnel in his administration. This is unquestionably not indicative of the Russian government having an idea to handle the crisis. So, the IMF did approve the loan to the Russians. But this increases a very important question the following. Why performed the IMF loan money to a federal government that didn't have an idea on how to use it? The answer to that is easy. The IMF have what needed to be done for the Russians to flee the problems. But, enough time that the help was presented with to the Russians had not been right. It was late to allow them to recover from such a significantly difficult position. And what makes it worse is the fact such a corrupted federal government could never allocate the amount of money effectively to avoid the collapse of the economy.

Conclusion:

The sources of the Russian financial meltdown were mainly from the politics and the financial sector of Russia's authorities. The Asian crisis played a very important role in causing it as it was accountable for nov the demand for Russian exports and also for the sharp increase in their prices. Also, the federal government enjoyed an important part in enabling the situation getting out of palm. The Russian federal failed to produce the plan that would help Russia all the financial collapse of 1998. Actually, the only plan that the Russian federal government developed was bottom on two assumptions. The first is that the inflow of the administrative centre by investors would continue steadily to flow in the united states and the second is that the rates of interest would be stored in a relatively low level. Both assumptions didn't come true so the plan of the Russian authorities failed from its roots as it was full of flaws.

The IMF did help the Russian Federation in those days but it was past due and after that the Russian federal didn't have an idea of how to make use of the money that they acquired from the business. So, the help of the IMF could have solve the situation temporarily, as it do for a couple weeks, but giving school funding to a country that is on the edge of slipping bankrupt is not a substantial way to help treat the challenge. It is only a short-term injection that should be accompanied by a very well-organized plan about how to face the problems. And seemingly, the Russian authorities of Boris Yeltsin did fail in this.

Bibliography:

OECD Economic Surveys, Russian Federation, March 2000, OECD Publications

Roy Medvedev, Post - Soviet Russia: A Voyage Through the Yeltsin Time, 2000, Columbia University Press

Vladimir Mau, From problems to Progress, The Centre for Research into Post-Communist Economies, 2005.

www. imf. org

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